Thursday, May 01, 2003

Addicted to Overdraft

We Israelis are addicted to overdraft. I don’t use the term figuratively

Just as the tobacco companies have systematically over the years added a variety of highly addictive agents into cigarettes, the Israeli banking system has its own built-in means to ensure that consumers fall, and then stay, helplessly mired in that unique Israeli form of debt: the overdraft.

You only have to look at the statistics to understand the extent of the problem: A mere 5% of Israelis are not in “minus” by choice. Of the rest, 75% are regularly in the red and 20% want to be but can’t (i.e., the bank won’t extend them the credit).

In 2001, Israelis paid nearly US$2 billion in interest on their overdrafts. That works out to somewhere between a half to a full month’s salary per year per person, just for the interest. With an estimated 30% of all divorces coming as a result of financial issues, this is serious business. And it’s just as serious for the banks, who are equally intent on keeping the money flowing in.

How did all this happen? It’s a result of a particularly unique aspect of the Israeli banking system.

In essence, as soon as the Israeli consumer deposits a minimum of three salaries into the bank, he or she is automatically extended a line of credit equal to a month’s salary. No need to ask, no need to apply. Your salary has effectively doubled overnight. Or so that’s how it’s pitched. Who wouldn’t want that?

It’s so insidious, in fact, that you actually have to ask not to receive the credit line. Why bother? Because you get charged for the privilege of being able to rack up interest payments of anywhere between 14-23%, whether you use it or not.

But as we’ve already seen, Israelis love to use it.

And why not? In Israel, there is no stigma attached to being in overdraft. Israelis will proudly tell you that they’re deep in the red and by exactly how much. That’s right after they ask you how much your salary is, not to mention your mortgage, school fees and one of a thousand other questions that would be deemed insultingly personal anywhere else in the world.

To illustrate the point, recently my wife Jody went in to the bank to ask for more details regarding the interest payments on our own overdraft. She had heard the banks quietly offer loans with a lower interest rate that could be very helpful with our own overdraft. The teller looked at her like she was a lunatic. And then she offered Jody an even higher credit line.

“One and half times your monthly salary,” she said in sweet earnestness.

“You don’t understand,” Jody pleaded. “I’m trying to get out of overdraft.”

But the two of them were speaking entirely different languages.

One more thing, not unique to Israel, but very different from North America: there are no real credit cards. They’re all essentially debit cards, automatically plunging your checking account further into the red on a specific day of the month. As a result, you don’t have the luxury of choosing the amount of your monthly payments, or using one credit card to pay off another. And because your line of credit is so easily extended, you can barely even bounce a check, for crying out loud!

You wind up feeling so completely out of control, you figure why bother even trying? Is it any wonder then that, according to Globes columnist Judy Maltz, in any given month a typical family with one breadwinner spends over 35 percent more than it takes in.

In the last year, as a result of cuts in salary, a worsening economy, and the depreciating shekel, Jody and I decided it was time to do something about our growing overdraft addiction. We’re not in as bad shape as many of our friends, but even still, we checked ourselves into self-imposed rehab and started practicing some serious budgeting.

The main act: looking at every little expense and snipping wherever possible. Nothing was sacred.

Out went the bottled water service. Turns out we could save 13 shekels per bottle. Multiply that by two bottles a week, and it comes out to more than 100 shekels a month.

Fridays have traditionally been pizza day in our house. We already cut out buying the kids sodas last year (we bring our own which I’m sure annoys the hell out of the pizza guy, but since we’ve been coming for so many years he doesn’t say anything). Now we go only once a month and the rest of the time we eat what’s in the freezer, bought at the supermarket for half the price.

Jody became a master at bargaining: she got the afternoon childcare down by 15%. Our Internet provider: down 50 shekels a month. Karate lessons, off 20%. Even the doctor and the dentist were willing to make a deal to keep us. It seems that business is bad all around and everyone is willing to negotiate. Or maybe it was always this way and we just didn’t know.

We started using cash instead of credit cards. We stopped eating out in cafes and we more often brown-bag it or picnic. A romantic evening now consists of a walk around the block in the rain. Since we started turning off the lights, I bump into furniture more often. We wear sweaters indoors.

We’re making progress. And we don’t plan on living the monks’ life indefinitely. It’s going to take time, but we’re confident that the numbers are eventually going to line up the way they should.

Do we feel deprived? Not in the least. For the first time in our eight years here, we are acting like adults, taking control of our finances. We may be odd-balls, voluntarily disqualifying ourselves from the most popular club in town, to the disapproving disbelief of our neighbors, but we feel good. We are empowered.

And when everything else feels out of control in the Middle East, a little empowerment can go a long way.

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Over the course of the last year, Jody has become an expert at budgeting. So much so that she is now offering her expertise to the public at large. She teaches a class called “Household Financial Management: Mastering the Israeli System.” If you are reading this from Israel and worrying about your own overdraft, the next class starts May 12.